Each simultaneously puts $0-$5 in envelope (or via computer)
Experimenter collects ‘contributions’, doubles total, divides it equally among group
Additional readings on private provision of a public good, Charitable giving, Information goods \(\rightarrow\) further below
Key goals of these lectures (and accompanying self-study)
How do economists define a public good? What fits into this category?
Better understand ‘market failures’
Understand (in general):
Outline: What’s a public good, why do markets provide these sub-optimally, (how) can governments provide these optimally, when do people provide them voluntarily?
… Occur when prices don’t fully reflect the marginal social benefits or costs
May provide scope for political intervention
How does this happen?
What are the characteristics of a public good?
Def – A Pure Public Good is a good that is both
The fact that some people use the good doesn’t prevent others from using the same good.
There is no ‘crowding.’
Provision/consumption to additional users at zero marginal (social) cost.
Excludable and rival (depleatable)? \(\rightarrow\) Private good
‘Club goods’: excludable but non-rivalrous (at least up to a congestion point).
“Common property”: Nonexcludable but rivalrous
‘Somewhat’ nonexcludable and/or ‘somewhat’ nonrival: –> ‘impure public goods.’
What about?
What about?
The basic ideas
If a good is non-rival then additional provision (of the units produced, to more consumers) is costless.
Thus,
And…
(If non-rival)
Even if each person provided it for their own benefit (on the assumption that no one else would), they would typically choose too little from a social POV…
Considering their own marginal benefits (and MRS) versus the price or cost, not the social marginal benefit (an ‘externality’ to them)
If a good is non-excludable it will be difficult to charge people for it
But if firms cannot charge for its full value, they might not pay the fixed costs to develop/build/provide it
Who would pay to produce a film that is freely pirated/distributed? Who would pay to develop a drug that must be priced at its marginal cost? Why contribute to police protection for your village, if your neighbours will pay for it anyways?
Policy: ‘Public goods argument’ - justifies many government programmes (military, environmental cleanup, research, etc)
Management: Companies/individuals can only profit (or even cover costs) from providing a public good through ???
…gaining subsidies, helping others avoid enforcement (fines) or ???
gaining voluntary support … or ??
by turning it into a private (or excludable) good.
Drug R&D may be a public good, or a common resource
Expensive to develop and introduce a new drug – ‘sunk costs’ once developed
But cheap to copy and produce; without patent protection may have \(P=mc\) and no ex-post profit to compensate for sunk costs
\(\rightarrow\) No incentive to develop drugs without patent protection guaranteeing ‘excludability’ and a limited monopoly
(…drug development)
But ex-post, patent protection is costly; drug produced for a few pennies, sold for 1000’s
\(\rightarrow\) Inefficient: some consumers may value drug at 100’s, far above MC, yet they don’t consume it
Possible solution: Government awards and subsidies for drug development.
The First Welfare Theorem’s assumptions/conditions do not apply to public goods. Markets do not yield a Pareto Optimal outcome.
Overall value of a private good: (area under the) ‘horizontal sum’ of individual marginal benefit curves
\(\rightarrow\) aggregate value, thus ‘social marginal benefit’ of public good sums vertically
MOVE to powerpoint here
With a binary choice (provide or don’t) it is a ‘Prisoner’s Dilemma’:
3-5 minutes
Partner in groups of 2-3 with the person on your right/left. Can you agree on and explain in simple language?
What is a public good? What do we call a good with only 1 of these 2 necessary properties?
Why does the free market underprovide these? Why/when do they provide some amount?
2 minute exercise - partner in groups of 2-3
What is an example of a public good, perhaps one from your own life that we didn’t already mention
What are some things you think may lead to more voluntary provision of public goods?
(Skip: Lindahl equilibrium)
Pure public goods not provided optimally by free market, i.e., voluntarily
A justification for government: to enforce contributions to public goods, and make everyone better off
Suppose some people like fireworks, and some don’t. How many should the town pay for?
\(\rightarrow\) Fireworks-lovers may overstate their value to skew the average.
\(\rightarrow\) Many people understate their value to avoid having to pay. Doh!
Thus:
Direct voting on each proposal also may not lead to the optimal choice
Red: None \(\succ\) Soft \(\succ\) Hard
Blue: Soft \(\succ\) Hard \(\succ\) None
Purple: Hard \(\succ\) None \(\succ\) Soft
Which proposal would win if they voted on:
Does a majority vote reveal a clear ‘social preference’?
No, not here.
Typical ‘Public Goods Experiment’
Each simultaneously puts $0-$5 in envelope (or via computer)
Experimenter collects ‘contributions’, doubles total, divides it equally among group
My private benefit from this ‘public good’ = \(\frac{1}{2}\) of total contributions, so I only get back half of my own contribution
We say the ‘marginal per capita return’ \((MPCR=1/2)\)
Basic results
Exam-type questions
… (2018 exam)
Ledyard, J.O., 1993. Public Goods: A Survey of Experimental Research, Division of the Humanities and Social Sciences, California Institute of Technology.
Chaudhuri, 2011. Sustaining cooperation in laboratory public goods experiments: a selective survey of the literature
Vesterlund, Lise. “Voluntary giving to public goods: moving beyond the linear VCM.” Handbook of Experimental Economics 2 (2012).
Varian, Hal R. “Buying, sharing and renting information goods.” The Journal of Industrial Economics 48.4 (2000): 473-488.
See my page: innovationsinfundraising.org
I’d love to have your feedback on this
Survey and handbook articles
Andreoni and Payne (2013). Chapter 1 ‘Charitable Giving’ in Auerbach, Alan J., et al., eds. Handbook of public economics. Vol. 5. Newnes, 2013.
List (2011). Econ Perspectives or List (2008, ExpEcon), ’Introduction to field experiments in economics with applications to the economics of charity
Andreoni (2006), ‘Philanthropy’ in Handbook of Giving, Reciprocity and Altruism; Andreoni (2005). ‘Charitable Giving’
Bekkers and Wiepking, esp ‘Part 2: why do people give’
Sargent and Woodliffe;
Duncan (2004); Atkinson (2008); List (2011, JEPR)
Non-academic accounts: Behavioural Insights Team (2013), ‘Applying Behavioural Insights to Charitable Giving.’ (Semi-academic)
When and why these may have characteristics of Public Goods
How firms may profit from selling information goods, and when this may be less than efficient
Government intervention and potential policy improvements in these markets